Rostenkowski May Be Ready to Deal on Tax Cut for Capital Gains

In a sharp turnaround, the chief tax lawmaker in the House has opened the door to a compromise with President Bush on his controversial proposal to cut capital gains taxes, according to congressional sources.

House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) is considering a plan that would lower the top capital gains rate to 20% for at least one year. The plan would also allow investors to adjust for inflation so that they would not be taxed on profits that simply reflected general price increases, a congressional tax specialist said Thursday.

Under current law, capital gains for individuals are treated the same as other income, which can lead to a rate as high as 33%.

Rostenkowski’s apparent turnaround on the issue breathes fresh life into a proposal that was widely considered dead on Capitol Hill and gives it a much stronger chance of becoming law. But any cut in the capital gains tax is still bound to run into opposition from many Democrats who consider it an unnecessary boon to the wealthy.

If approved by Congress, the compromise would mark a major victory for Bush, whose proposal early this year to cut the top capital gains rate to 15% was brusquely dismissed by Rostenkowski and most other Democrats.

“It sounds like the kind of compromise that would be quite workable,” a White House official said. “We’re not locked in on the 15% rate.”

Despite the initial rejection from Democrats on Capitol Hill, Administration officials have continued to press lawmakers to approve a cut in the capital gains tax to help narrow the deficit, repeatedly insisting that they would accept no other method to raise revenues for next year’s federal budget.

Cutting the capital gains rate would boost government revenues at least temporarily, tax experts say, by encouraging investors to sell more stocks and bonds than normal to take advantage of lower rate.

Last month, the White House and congressional leaders settled on a budget blueprint for fiscal 1990 that calls for $5.3 billion in additional revenues but they failed to agree on how to accomplish that goal. Lawmakers pledged, however, to propose only tax measures acceptable to the White House.

By refusing to consider any significant loopholes in Bush’s pledge to oppose tax hikes, Administration officials may have convinced Rostenkowski that a capital gains compromise offers the best chance of holding the federal deficit under the $110-billion ceiling imposed by the Gramm-Rudman budget law.

A spokesman for the Ways and Means Committee said that it is “premature” to talk about any specific capital gains plan but acknowledged that Rostenkowski has been prepared to discuss possible compromises with Bush. Other staff members were reluctant to discuss the plan, but a tax specialist outside the committee said he had been told that Rostenkowski wanted to make a deal with Bush.

Earlier this year, as a key element of his budget and economic policies, Bush proposed to slash the maximum tax on investment profits for individuals by more than half under a plan that eventually would require assets to be held for three years before they would benefit from the lower rate.

The Administration predicted that its capital gains plan would raise $4.8 billion during the next fiscal year and $4.9 billion in fiscal 1991. But Treasury officials acknowledged that it might lose revenues in some later years and would not add significantly to the government’s coffers over the long run.

The new capital gains proposal, initially suggested by tax specialists on Congress’ Joint Tax Committee, is designed to raise at least $2 billion in revenues in fiscal 1990 by cutting the rate to 20%. The plan would gain additional billions in revenues under a complex plan that would allow investors to take advantage of the lower tax rate without immediately selling their assets.

Indexing capital gains against inflation would help overcome opposition from some Democrats by rewarding investors who hold assets for a longer period and by possibly mitigating the excessive benefits of a capital-gains tax cut for the wealthy.

Unlike Bush’s proposal, the plan Rostenkowski is considering might cut capital gains rates only temporarily. It would also make the capital gains tax benefit available to those who hold an asset for at least one year.

When Bush first offered his capital gains proposal in February, Rostenkowski adamantly opposed it, saying it would upset the massive 1986 tax overhaul and would unduly favor the wealthy.

“I’m not about to tell the wage earners in Chicago that they should pay a higher tax than stockbrokers,” Rostenkowski said at the time.

ECONOMIC ESTIMATE REVISED

The nation’s economy grew at an annual rate of 4.3% during the first three months of the year, below the 5.5% estimated a month ago. Page 4.